XML 41 R25.htm IDEA: XBRL DOCUMENT v3.19.1
Note 17 - Taxation
 12 Months Ended
Dec. 31, 2018
Notes to Financial Statements  
Income Tax Disclosure [Text Block]
17.
 Taxation
 
1
)
Income tax
 
The entities within the Company file separate tax returns in the respective tax jurisdictions in which they operate.
 
i). a. The Company is incorporated in the state of Nevada. Under the current law of Nevada, the Company is
not
subject to state corporate income tax. Following the Share Exchange, the Company became a holding company and does
not
conduct any substantial operations of its own. Before enactment of the Tax Cuts and Jobs Act (“TCJA” or the “Act”) in
December 2017,
the Company did
not
provide for U.S. taxes or foreign withholding taxes on undistributed earnings from its non-U.S. subsidiaries because such earnings are intended to be reinvested indefinitely. If undistributed earnings were distributed, foreign tax credits could become available under current law to reduce the resulting U.S. income tax liability.
 
i). b. On
December 22, 2017,
the U.S. enacted the Act (which is commonly referred to as “U.S. tax reform”). The Act significantly changes U.S. corporate income tax laws including but
not
limited to reducing the U.S. corporate income tax rate from
35%
to
21%
beginning in
2018,
imposing a
one
-time mandatory tax on previously deferred foreign earnings
and imposing a new tax on global intangible low-taxed income (“GILTI”) effective for tax years of non-U.S. corporations beginning after
December 31, 2017.
On
December 22, 2017,
the Securities and Exchange Commission staff issued Staff Accounting Bulletin
No.
118
(“SAB
118”
), which provides guidance on accounting for the tax effects of the Act. SAB
118
provides a measurement period (the “grace period”) that should
not
extend beyond
one
year from the Act enactment date through
December 21, 2018,
for companies to complete the accounting under ASC
740
“Income Taxes”. In accordance with SAB
118,
a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC
740
is complete.
 
i). c. The Company has completed its assessment of the
one
-time transition tax on its previously deferred foreign earnings during the
third
fiscal quarter of
2018,
based on which, the Company concluded that
no
incremental income tax expense of the
one
-time mandatory tax on its previously deferred foreign earnings would be charged for the year ended
December 31, 2017,
as the Company had sufficient U.S. net operating losses carryforwards to offset the resulting incremental taxable income related to the deferred foreign earnings, which assessment was consistent with that disclosed in the Company’s
2017
Form
10
-K. Based on the final assessment, the Company recognized an adjustment of approximately
US$0.46
million for the year ended
December 31, 2018,
to revise the provisional estimated amount of net operating loss utilized through toll charge income it recognized for the year ended
December 31, 2017,
from approximately
US$1.40
million to approximately
US$1.86
million. The Company also remeasured its U.S. deferred tax assets based on the new tax rate upon enactment of the Act.
 
i). d. Effective from
January 1, 2018,
the Company is subject to the new GILTI tax rules. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”), subject to the possible use of foreign tax credits and a deduction equal to
50
 percent to offset the income tax liability, subject to some limitations. Under U.S. GAAP, the Company has made an accounting policy choice of treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”), instead of factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). For the year ended
December 31, 2018,
no
provision for federal corporate income tax has been made in the financial statements as the Company has
no
aggregated positive tested income.
 
ii). China Net BVI and ChinaNet Investment BVI were incorporated in the British Virgin Islands (“BVI”). Under the current law of the BVI, these BVI companies are
not
subject to tax on income or capital gains. Additionally, upon payments of dividends by these BVI companies to its respective shareholders,
no
BVI withholding tax will be imposed.
 
iii). China Net HK was incorporated in Hong Kong and does
not
conduct any substantial operations of its own.
No
provision for Hong Kong profits tax has been made in the financial statements as China Net HK has
no
assessable profits for the year ended
December 31, 2018
or any prior periods. Additionally, upon payments of dividends by China Net HK to its shareholders,
no
Hong Kong withholding tax will be imposed.
 
iv). The Company’s PRC operating subsidiaries and VIEs, being incorporated in the PRC, are governed by the income tax law of the PRC and is subject to PRC enterprise income tax (“EIT”). The EIT rate of PRC is
25%,
which applies to both domestic and foreign invested enterprises.
 
l
 Business Opportunity Online was approved by the related PRC governmental authorities as a High and New Technology Enterprise, which enabled the entity, as approved by the local tax authorities of Beijing, the PRC, to enjoying the preferential EIT rate of
15%
until
November 2018.
Business Opportunity Online re-applied the qualification of High and New technology Enterprise in
September 2018
and has obtained the approval in
February 2019.
As a result, Business Opportunity Online is entitled to continue enjoying the
15%
preferential EIT rate until
November 2021.
Therefore, for the years ended
December 31, 2018
and
2017,
the applicable EIT rate of Business Opportunity Online was
15%.
In
August 2018,
the PRC State Administration of Taxation (the “SAT”) issued a Bulletin (
2018
Bulletin
No.
45
), which extended the net operating losses (NOLs) carryforward period for High and New Technology Enterprise and Small and Medium-sized Tech Enterprises from the PRC standard NOL carryforward period of
5
years to
10
years. In accordance with the
2018
Bulletin
No.
45,
which come into effect from
January 1, 2018,
an enterprise that obtains qualification as or remains as a High and New Technology Enterprise or Small and Medium-sized Tech Enterprise in any time of
2018
and afterwards, is allowed to carry forward all its previous
five
years’ NOLs (starting from NOL of
2013
) to up to
ten
years.
 
l
 The applicable EIT rate for other PRC operating entities of the Company is
25%
for the years ended
December 31, 2018
and
2017.
 
l
 The current EIT law also imposed a
10%
withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a
5%
withholding tax rate, subject to approval from the related PRC tax authorities.
 
For the years ended
December 31, 2018
and
2017,
the preferential income tax treatment enjoyed by the Company’s PRC VIE, Business Opportunity Online was based on the current applicable laws and regulations of the PRC and approved by the related government regulatory authorities and local tax authorities where Business Opportunity Online operates in. The preferential income tax treatment is subject to change in accordance with the PRC government economic development policies and regulations. The preferential income tax treatment is primarily determined by the regulation and policies of the PRC government in the context of the overall economic policy and strategy. As a result, the uncertainty of the preferential income tax treatment is subject to, but
not
limited to, the PRC government policy on supporting any specific industry’s development under the outlook and strategy of overall macroeconomic development.
 
2
)
Turnover taxes and the relevant surcharges
 
Service revenues provided by the Company’s PRC operating subsidiaries and VIEs were subject to Value Added Tax (“VAT”). VAT rate for provision of modern services (other than lease of corporeal movables) is
6%,
and for small scale taxpayer,
3%.
Therefore, for the years ended
December 31, 2018
and
2017,
the Company’s service revenues are subject to VAT at a rate of
6%,
after deducting the VAT paid for the services purchased from suppliers, or at a rate of
3%
without any deduction of VAT paid for the services purchased from suppliers. The surcharges of the VAT in the aggregate is
12%
to
14%
of the VAT, depending on which tax jurisdiction the Company’s PRC operating subsidiaries and VIE operate in.
 
As of
December 31, 2018,
and
2017,
taxes payable consists of:
 
    As of December 31,
    2018   2017
    US$(’000)   US$(’000)
                 
PRC turnover tax and surcharge payable    
1,215
      
1,295
  
PRC enterprise income tax payable    
1,782
      
1,873
  
Taxes payable    
2,997
      
3,168
  
 
A reconciliation of the income tax benefit determined at the U.S. federal corporate income tax rate to the Company’s effective income tax expense is as follows:
 
    Year Ended December 31,
    2018   2017
    US$(’000)   US$(’000)
                 
Pre-tax loss    
(13,363
 )    
(9,760
 )
U.S. federal rate    
21
 %    
35
 %
Income tax benefit computed at U.S. federal rate    
2,806
      
3,416
  
Reconciling items:                
Rate differential for PRC earnings    
561
      
(724
 )
Preferential tax treatment effect    
(231
 )    
(238
 )
Tax effect on non-taxable change in fair value of warrant liabilities    
350
      
-
  
Tax effect on non-deductible impairment on goodwill    
(1,303
 )    
-
  
Tax effect on change of net operating loss treatment    
1,130
      
-
  
Tax effect on enactment of new tax rate    
-
      
(1,859
 )
Tax effect on toll charge income from the Act    
-
      
(492
 )
Tax effect on adjustment to provisional amount of toll charge income from the Act    
(96
 )    
-
  
Provision/reverse of valuation allowance on deferred tax assets    
(3,504
 )    
90
  
Expired tax attribute carryforwards    
(365
 )    
(524
 )
Tax effect on other non-deductible expenses/non-taxable income    
(112
 )    
80
  
Effective income tax expense    
(764
 )    
(251
 )
 
For the years ended
December 31, 2018
and
2017,
the Company’s income tax expense consisted of:
 
    Year Ended December 31,
    2018   2017
    US$(’000)   US$(’000)
                 
Current-PRC    
-
      
(1
 )
Deferred-PRC    
(764
 )    
(250
 )
Income tax expense    
(764
 )    
(251
 )
 
The Company’s deferred tax assets at
December 31, 2018
and
2017
were as follows:
 
    As of December 31,
    2018   2017
    US$(’000)   US$(’000)
                 
Tax effect of net operating losses carried forward    
9,243
      
7,115
  
Bad debts provision    
1,188
      
879
  
Valuation allowance    
(9,875
 )    
(6,636
 )
Total net deferred tax assets    
556
      
1,358
  
 
The U.S. holding company has incurred aggregate net operating losses (NOLs) of approximately
US$19.2
million and
US$13.3
million at
December 31, 2018
and
2017,
respectively. The NOLs carryforwards as of
December 31, 2017
gradually expire over time, the last of which expires in
2037.
NOLs incurred after
December 31, 2017
will
no
longer be available to carry back but can be carried forward indefinitely. Furthermore, the Act imposes an annual limit of
80%
on the amount of taxable income that can be offset by NOLs arising in tax years ending after
December 31, 2017.
The Company maintains a full valuation allowance against its net U.S. deferred tax assets, since due to uncertainties surrounding future utilization, the Company estimates there will
not
be sufficient future earnings to utilize its U.S. deferred tax assets.
 
The NOLs carried forward incurred by the Company’s PRC subsidiaries and VIEs were approximately
US$25.2
million and
US$19.9
million at
December 31, 2018
and
2017,
respectively. The losses carryforwards gradually expire over time, the last of which expires in
2028.
The related deferred tax assets were calculated based on the respective net operating losses incurred by each of the PRC subsidiaries and VIEs and the respective corresponding enacted tax rate that will be in effect in the period in which the losses are expected to be utilized.
 
The Company recorded approximately
US$9.9
million and
US$6.6
million valuation allowance as of
December 31, 2018
and
2017,
respectively, because it is considered more likely than
not
that a portion of the deferred tax assets will
not
be realized through sufficient future earnings of the entities to which the operating losses related.
 
For the year ended
December 31, 2018,
total valuation allowance increased by approximately
US$3.5
million. For the year ended
December 31, 2017,
a net reverse of approximately
US$0.09
million valuation allowance was recorded, as the Company remeasured its U.S. deferred tax assets using the new statutory rate of
21%
and resulted in a reduction of approximately
US$1.9
million deferred tax assets, which was fully offset by a decrease in valuation allowance, therefore, there is
no
effective tax rate impact to the Company.